he headquarters of Alphabet’s X labs in Mountain View, California, is
easy to miss. A simple yellow “X” marks the visitors’ entrance to the
sprawling building that was once a large indoor shopping mall. But on a
weekday in late May, the parking lot is bustling, filled with employees
and visitors, as X’s pod-like driverless cars buzz about. Inside,
various teams of mostly young people—the company won’t say just how many
people are employed at the facility—work on “moon shots,” which Alphabet
defines as transformative technologies that could have a huge impact on
the world. Besides the driverless cars, publicly identified projects at
X include Loon,
an effort to use high-altitude balloons to deliver the Internet to
remote regions of the world; Wing, which is building self-navigating
drones for delivering stuff; and Makani, which is developing odd flying
wind turbines tethered to a ground station.

Inside, skateboards, bikes, and scooters are everywhere, as
are machine shops and expensive analytical instruments. This postmodern
industrial research center—part design studio, part tech incubator, and
part science lab—represents Silicon Valley at its best: ambitious,
creative, and fixated on radical new technologies. And while X may have
been widely ridiculed for its failure to convince the world that people
needed its Google Glass, its remarkable progress with driverless
cars—which are common enough on the surrounding streets of Mountain View
to attract little notice—could make us forget such missteps. But
Alphabet’s X, with its heavy investment in resources and people, also
reminds us just how difficult it is to commercialize radical new
technologies and how few companies can afford such efforts.

Given impressive advances in artificial intelligence,
smart robots, and driverless cars, it’s easy to become convinced that we
are on the verge of a new technological age. But the troubling reality
is that today’s advances are having a far from impressive impact on
overall economic growth. Facebook,
Twitter, and other digital technologies undoubtedly bring great value
to many people, but those benefits are not translating into a
substantial economic boost. If you think Silicon Valley is going to fuel
growing prosperity, you are likely to be disappointed—or you’d better
be patient. While the high-tech industry creates impressive wealth for
itself, much of the country is mired in a sluggish economy. It might be
that driverless cars and other uses of advanced AI will eventually
change that, but for now these technologies are not radically
transforming the economy.

Economists who study productivity, a measure of output
per worker, tell us that from around 1994 to 2004 the Internet and
advances in computation helped fuel rapid growth. But during the past
decade we slid back to far slower improvements in productivity, hence
stagnant economic growth. And the phenomenon is showing up in advanced
economies around the world, with countries such as Italy and the U.K.
particularly hard hit. Many people feel the results as flat or declining
wages, and the consequences have almost certainly contributed to deep
political unrest in many countries. According to Chad Syverson, an
economist at the University of Chicago Booth School of Business, U.S.
productivity grew at a mere 1.3 percent per year from 2005 to 2015, far
less than the 2.8 percent annual growth rate during the decade earlier.
Syverson calculates that had the slowdown not occurred, the gross
domestic product would have been $2.7 trillion higher by 2015—about
$8,400 for every American.

No one really knows the reason for the slowdown. Perhaps
we have run out of ideas that match the great inventions of the 20th
century in economic importance (see “Tech Slowdown Threatens the American Dream”).
Or perhaps we haven’t done a good job measuring how recent advances in
digital technologies and social media have affected the economy: if
Facebook, YouTube, and Twitter are making us more productive, we don’t
know because we can’t tally the true value of this free stuff. That’s
possibly true, but even if it is, it doesn’t account for anything close
to the measured slowdown in overall productivity growth. A more
plausible explanation: it is proving difficult to convert recently
developed digital technologies into meaningful changes in the economy’s
largest sectors, such as health care, manufacturing, and transportation.

Even some of the strongest proponents of the idea that
automation and digital technologies are going to revolutionize our
economy are dismayed by the slow progress in implementing these
advances. Erik Brynjolfsson, a professor at MIT’s Sloan School of
Management and coauthor of The Second Machine Age, says the
process has been “disappointingly difficult.” He says that while there
has been “a lot of progress in the underlying technologies” in the last
few years, companies are finding that making the necessary changes is
expensive and takes time. “It’s not trivial. It’s not like flipping a
switch,” says Brynjolfsson. “And companies are struggling.

Michael Mandel, an economist at the
Progressive Policy Institute in Washington, D.C., says the productivity
slowdown is occurring in what he calls the physical industries,
including manufacturing and health care. Such industries, which he
estimates make up 80 percent of the national economy, account for only
35 percent of investments in information technology and their
productivity reflects that, growing at only 0.9 percent annually.
Meanwhile, productivity is growing by 2.8 percent a year in what Mandel
calls digital industries, which include finance and business services.

If that is what is going on, it leaves plenty of room for
optimism. “As we learn to apply the new technologies,” says Mandel, “we
could see growth in productivity speed up again.” Syverson agrees that
while the IT gains of the late 1990s and early 2000s seem played out, he
can “imagine a second wave.”

A material worldOur list of 50 Smartest Companies
includes some that have used new digital technologies to destroy
existing industries: Amazon, with its growing dominance of retail trade,
and Facebook, with its inroads into the media. But it also includes
examples of mature companies, like Bosch, a large German manufacturer
using IT to meet its business challenges (we go to Allgäu, Germany, to
visit a “factory of the future”).
And it includes those pushing the limits of new digital technologies,
as Baidu is doing in its effort to create autonomous cars and Alphabet
with its remarkable advances in artificial intelligence....MUCH MORE